Advice and the Advisor

Investing in 'Social Good' Up By 22 Percent This Year

The number of clients telling their portfolio managers to seek both social and financial good from their investments is increasing according to a report from the US SIF - The Forum for Sustainable and Responsible Investment.

The report by US SIF Foundation, a private foundation, found that more than one out of every nine dollars under professional management was invested under so-called Sustainable and Responsible Investing (SRI) practices.

Approximately 11.3 percent, or 3.7 trillion, of the $33.3 trillion in total assets under management in 2011 were SRI investments, according to Thomson Reuters data.

That represented a 22 percent increase over the previous year.

SRI investments require money managers, investors or shareholders to incorporate environmental, societal, community or governance issues into their investment decisions.

Public pension funds such as CalPERS, California's Public Employees' Retirement System with $226.6 billion in assets, last year committed to incorporating environmental, social and governance (ESG) factors across its portfolio, following the lead of California State Teachers' Retirement System.

"That doesn't mean that CalPERS is deeply integrating every (SRI factor), but it does move the needle when you have got a commitment on the part of CalPERS to measure ESG across all asset classes. It makes people think about this more seriously," said Joshua Humphreys, fellow at Tellus Institute in Boston.

There are large numbers of institutions and funds yet to incorporate such criteria for investment saying that to do so would limit their choices and returns, while possibly increasing portfolio risk.

"When you start limiting what you can invest or what you are interested in investing in, structurally it does reduce the opportunity for return," said Verne Sedlacek, president and chief executive of Commonfund, which provides investment management services to more than 1,500 nonprofit institutional investors.

But research has found that ESG or SRI investment methods perform at par with conventional techniques.

The MSCI KLD Social Index ETF has returned 14.78 percent since 2006, while the S&P 500 has gained 15.69 percent, according to Thomson Reuters data.

Money managers are increasingly incorporating ESG factors into their investment strategies driven by client demand and values. The majority of these investors are mutual funds, endowments, foundations, public pension funds, hospitals, religious institutions, credit unions and venture capitalists.

From 1995, when the foundation first measured the size of the U.S. sustainable and responsible investing market, to 2012 the SRI universe has increased 486 percent, while the broader universe of assets under professional management in the United States has grown 376 percent, according to Thomson Reuters estimates.

The biggest disadvantage, researchers say, is the lack of ESG financial products readily available as the infrastructure of the capital markets is not as developed.

"In emerging markets, if you are relying on retail investment products like mutual funds there is a dearth of opportunities," the Tellus Institute's Humphreys said. "Without opportunities investors have to do something really bespoke with their managers to find returns."